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How to Find Potential Handle Troughs within Bases

Note:  This article is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

3.  Look for Potential Handle Troughs Early in a Market Uptrend

Market uptrends will typically have 2-4 corrections before a bear market sets up.

If you look for potential handle troughs early on within an uptrend, it may be better because you'll have more early-stage bases than late-stage bases.

In my opinion, there's little reason to get into a stock early after it already had a big move and has formed 3 or more bases.

After a stock has been discovered by Wall Street, it's possible that it may gap down while in its base.

This tends to happen in weak market environment and/or late in a market uptrend.

Looking at the other side, the first correction of a market uptrend is typically a temporary move lower that eventually leads to higher prices.

Why may this be true?

From a psychological standpoint, the first correction after a bear market often recalls bad memories for most investors.

After an uptrend starts, the first sign of trouble can quickly trip many investors back into a bearish mindset.

You might hear some investors say, "Here we go again" or "I knew this rally was a trap".

Because this may be the case, the first move back down towards the market low may be viewed as a contrary indicator.

Most people will probably be bearish, so you may want to be bullish.

In addition to common behaviors of price, you may also want to look at individual stocks to see which groups are setting up in bases while the market is pulling back.

This may give you more confidence that you're not just guessing that a low will be made during the correction.

If stocks are forming bases and starting to break out, you will have more evidence to help you make a more informed decision that's based on the market's price action (facts).

4.  Find Potential Handle Troughs during Index Undercuts

Have you ever noticed that when a stock market undercuts a prior low, it tends to bounce for several weeks or more?

Sometimes it even puts in a long-term bottom on the undercut.

This happens mostly in bull markets, but it can also take place in bear markets.

When an index undercut (or rally after an undercut) occurs at the same time as a Right Side Curl with Reaccumulation, it may provide a stimulus to price that causes a stock to break out.

How so?

As a market undercuts a prior low, it may have the following human dynamics working in its favor to help drive prices higher:

  • Short trades are covered as new lows are printed or at the first sign of a reversal higher.
  • Short trades are initiated by bears who believe the market is breaking down.
  • Short trades are initiated by bears on rallies into resistance.
  • Scared investors sell out because the market made a new low.

Do you see what's happening?

There's not many people left to sell, but there are people who are buying or who'll have to buy if price doesn't meet their bearish expectations.

I have some historical examples of index undercuts that occur in tandem with Right Side Curl with Reaccumulation.

In my SLB example, the market (S&P 500) undercut its May 2004 low in early August, which was two weeks before SLB's Right Side Curl with Reaccumulation was confirmed.

The market then rallied back inside May's undercut level in late August 2004.

While this was happening, SLB confirmed a reaccumulation week AND traded above its high (see chart 1, page 3).

The result?

The market's upside reversal helped SLB rally 13% and break out of its base.

In summary, finding a potential handle trough within a base isn't a better alternative to a base breakout.

Instead, it's a potential option to consider before a breakout (using some of the factors outlined).

Sometimes a handle trough entry isn't stopped out, but a base breakout is and sometimes a handle trough entry offers opportunity earlier than a successful base breakout.

In the market, there are no guarantees in any set up.

Finding a potential handle trough and aligning it with confluence, gives you another idea to consider before a stock breaks out of a base.

Please >>CLICK HERE<< for a PDF of charts 1-3.




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